CAPITAL BUDGETING
CAPITAL BUDGETING
CONTENTSChapter noTopic namePage No
Chapter 1
INTRODUCTION
REVIEW OF LITERATURE1-33-26
Chapter 2
COMPANY PROFILE
INDUSTRY PROFILE
26-3939-41
Chapter 3
RESEARCH METHODOLOGY
NEED FOR THE STUDY
OBJECTIVES OF THE STUDY
SCOPE OF THE STUDY
METHODOLOGY
LIMITATIONS OF THE STUDY41-4444-4545-46
46-47
47-48
48-49
Chapter 4
DATA ANALYSIS AND INTERPRETATION
49-61
Chapter 5
FINDINGS AND SUGGESTIONS61-64
Chapter 6
CONCLUSION
BIBLIOGRAPHY64-67
Chapter 1
INTRODUCTION
REVIEW OF LITERATURE
INTRODUCTION:
Capital budgeting is the process of making investment decisions
in Capital Expenditures viz., acquisition of permanent assets as
plant & Machinery, Land & Building etc., Expansion,
improvement or alteration in the fixed assets, replacement assets,
research and development project cost.
Thus capital expenditure involves non-flexible long term
commitment of funds.
Capital Budgeting is concerned with the allocation of the firms
scarce financial resources among the available market
opportunities. The consideration of investments opportunities
involves the comparison of the expected future streams of earning
from a project with the immediate and subsequent streams of earning
from a project with the immediate and subsequent stream of
expenditures for it.
Definition of capital budgeting:
Capital budgeting involves a current investment in which the
benefits are expected to be received beyond one year in the future.
It suggests that the investment in any asset with a life of less
than a year, fails into realm of working capital management,
whereas any asset with a life of more than one year involves
capital budgeting. JAMES C. VAN HORNE The capital budget is
essentially a list of what management believes to be worthwhile
projects for the acquisition of new capital assets together with
the estimated cost of each project . ROBERT
N.ANTHONYCAPITALBUDGETING:
According to M.Y.KHAN and P.K.JAIN
Conventional investment projects are those projects which cash
out flows are confined to the initial period.
Independent projects are all profitable projects that can be
accepted.
The capital budgeting results would be unrealistic if the impact
of inflation is not correctly factored in the analysis. The cash
flow estimates will not reflect the purchasing power. Therefore
cash flow should be adjusted to accommodate the inflation factor so
that the capital budgeting decision reflects the true picture.
According to Weston and Brigham
Capital budgeting involves the entire process of planning
expenditure whose
Returns are expected to extend beyond one year
According to Charles T.Horngren
Capital budgeting is the long term planning for making and
financing proposed capital outlays.
According to Robert Anthony
The capital budgeting is a list of what management believes to
be worth while projects for the acquisition of new capital assets
together with the estimated cost of each project.
Capital budgetary (or investment appraisal) is the planning
process used to determine whether a firm's long term investments
such as new machinery, replacement machinery, new plants, new
products, and research development projects are worth pursuing. It
is budget for major capital, or investment, expenditures.
Steven M. Sheffrin (2003). Economics: Principles in action.
Upper Saddle River, New Jersey 07458: Pearson Prentice Hall.
(Article)
The author's main objective is to present a general overview of
the main capital budgeting concepts rather than to provide a "how
to do" recipe collection for practitioners actively involved in the
management of real investment projects.
Capital budgeting features:
It involve commitment of large amounts of funds.
It are irreversible or reversible at substantial loss. It
influence' the firm's growth in long run.
It affect the risk of the firm.
The main objectives of capital expenditure projects are:1. To
optimize and determine the capital projects that are feasible 2. To
estimate the experience involved3. To restrict the capital
expenditure on projects within authorized limits.
4.These methods use the incremental cash flows from each
potential investment, or projectPHASES OF CAPITAL BUDGETING:Capital
budgeting is a complex process, which may be divided into six broad
phases viz: planning, analysis, selection, financing,
Implementation and review.
PLANNING:
The planning pace of firms capital budgeting process is
concerned with the articulation of its board investment strategy
and the generation and preliminary screening of project proposals.
This provides the frame work which shapes, guides and circumscribes
the identification for individual project opportunities. Once a
project proposal is identified, it needs to be examined.
To begin with a preliminary project analysis is done. A prelude
to the full a down feasibility study, the exercise is meant to
access
Whether the project is prima facie worthwhile to justify study ?
What aspects of the project are critical to its viability and hence
in depth investigation is warranted.?ANALYSIS:
If the preliminary screening suggests that the project is prima
facie worthwhile a detailed analysis of the marketing, technical,
financial, economic, and ecological aspects is undertaken. The
focus of the phase of capital budgeting is on gathering, preparing
and summarizing relevant information about various project
proposals which are being considered for inclusion in the capital
budget. SELECTION:
Selection follows and often overlaps. It addresses the
question:
Is the project, worthwhile? A wide range of appraisal criteria
has been suggested to judge the worthiness of the project. They are
divided in to two broad categories, viz: non-discounting criteria
and
discounting criteria. The principal non-discounting criteria are
the PBP and accounting rate of return. The key discounting criteria
are the NPV, the IRR and the benefit cost ratio.
The apply the various appraisal criteria suitable cut - off
values (hurdle rate, target rate and cost of capital) have to be
specified. These are essentially a function of the mix of financing
and level of project risk, while the former can be defined with
relative ease. The later truly test the ability of the project
evaluator. Indeed, despite a wide range of tools and techniques for
risk analysis (sensitivity analysis, Monte Carlo simulation,
decision tree analysis, portfolio theory, capital asset pricing
model and so on), risk analysis remains the most intractable part
of the project evaluation exercise.
FINANCING: Once a project is selected, suitable financing
arrangements have to be made. The two broad sources of finance for
a project are equity and debt. Equity (referred to as shareholders
funds) which consist of paid up capital, share premium, and
retained earnings. IMPLEMENTATION:
The implementation phase for an industrial project, which
involves setting up of manufacturing facilities, consists of
several stages:
(1). Project and engineering designs
(2). Negotiations and contracting
(3). Construction
(4). Training
(5). Plant commissioning
1. Adequate Formulation of Projects: A major reason for the
delay is, inadequate formulation of projects. Put differently, if
the necessary homework in terms of preliminary studies and
comprehensive and detailed formulation of the projects is not done,
many surprises and shocks are likely to spring on the way. Hence,
the need for adequate formulation of the project cannot be
overemphasized.
2. Use of the Principle of Responsibility Accounting: Assigning
specific responsibilities to the project managers for completing
the project within the defined time frame and cost limits is
helpful in expeditious execution and cost control.
3.Use of Network Techniques: For project planning and control
two basic techniques are available - PERT(Programmer Evaluation
Review Technique)
and CPM (Critical Path Method). These techniques have, of late,
merged add are been referred to by a common terminology, i.e.
Network Techniques. With the help of these techniques monitoring
becomes easier.
CAPITAL BUDGETING PROCESS
1. Identification of Investment Proposals: The capital budgeting
process begins with the identification of investment proposals. The
proposal or the idea about potential investment opportunities may
originate from the top management or may come from the rank and
file worker of any department or from any officer of the
organization. The departmental head analyses the various proposals
in the light of the corporate strategies and submits the suitable
proposals to the Capital Expenditure Planning Committee in case of
large organizations or to the officers concerned with the process
of long-term investment decisions.
2. Screening the Proposals. The Expenditure Planning Committee
screens the various proposals received from different departments.
The committee views these proposals from various angles to ensure
that these are in accordance with the corporate strategies or
selection criterion of the firm and also do not lead to
departmental imbalances.3. Analyses / Evaluation of Various
Proposals. The next step in the capital budgeting process is to
evaluate the profitability of various proposals. There are many
methods which may be used for this purpose such as pay back period
method, rate of return method, net present value method, internal
rate of return method etc.
It should, however, be noted that the various proposals to he
evaluated may be classified as: Independent proposals Contingent or
dependent proposals and
Mutually exclusive proposals. Independent proposals are those
which do not compete with one another and the same may be either
accepted or rejected on the basis of a minimum return on investment
required. The contingent proposals are those whose acceptance
depends upon the acceptance of one or more other proposals, e.g.,
further investment in building or machineries may have to be
undertaken as a result of expansion programme.
Mutually exclusive proposals are those which compete with each
other and one of those may have to be selected at the cost of the
other.
4. Fixing Priorities from best alternatives:- After evaluating
various proposals, the unprofitable or uneconomic proposals may be
rejected straight away. But it may not be possible for the firm to
invest immediately in all the acceptable proposals due-to
limitation of funds. Hence, it is very essential to rank the
various proposals and to establish priorities after considering
urgency, risk and profitability involved therein
5. Final Approval and Preparation of Capital Expenditure
Budget:- Proposals meet in a the evaluation and other criteria are
finally approved to be included in the Capital Expending; Budget.
However, proposals involving smaller investment may be decided at
the lower levels for expeditious action. The capita! Expenditure
budget lays down the amount of estimated expenditure to he incurred
on fixed assets during the budget period.6. Implementing Proposal:-
Preparation of a capital expenditure budgeting and incorporation of
a particular proposal in the budget does not itself authorize to go
ahead with the implementation of the project. A request for
authority to spend the amount should further be made to the Capital
expenditure committee which may like to review the profitability of
the project in the changed circumstances.Further, while
implementing the project, it is better to assign responsibilities
for completing the project within the given time frame and cost
limit so as to avoid unnecessary delays and cost over runs.
Network techniques used in the project management such as PERT and
CPM can also be applied to control and monitor the implementation
of the projects.
7. Performance Review:- The last stage in the process of capital
budgeting is the evaluation of the performance of the project. The
evaluation is made through post completion audit by way of
comparison of actual expenditure on the project with the budgeted
one and also by comparing the actual return from the investment
with the anticipated return. The unfavorable variances, if any
should be looked into and the causes of the same be identified so
that corrective action may he taken in future.
8. Choosing basis for futuristic Capital Budgeting Decisions:-
This process is assumed as basis for any future Capital Investment
Decisions for better opportunities.
IMPORTANCE AND SIGNIFICANCE OF CAPITAL BUDGETING:Capital
budgeting decisions are more critical and crucial. Hence they
require utmost care while taking the same. They can be mainly
attributed to the following reasons:1. Involvement of heavy funds2.
Long term implication3. Irreversible decision4. Uncertain future
events1. Involvement of heavy funds: The capital budgeting
decisions involve large capital outlays. In such cases the firm
should carefully plan its investment programs. Incorrect decisions
can jeopardize the survival of the firm since huge funds get locked
up for long periods.
2. Long Term Implication:- The effect of Capital Budgeting
Decision will be felt by the firm over a long period; they have
decision influence on the rate and direction of the growth of the
firm. The short term decisions will take long term
applications.
3. Irreversible Decision:- Capital Budgeting decisions are
irreversible because it is very difficult to find a market for the
capital asset. Once the decisions are made the company has to abide
by the
Decision. These decisions cannot be reversed without incurring
substantial losses.
4. Uncertain future events:- These decisions require an
assessment of future events which are uncertain. It is really a
difficult task to estimate the probable future events, probable
benefits and costs accurately in quantitative terms. Thus, since
the future is uncertain these decisions become very crucial.
The term Capital Budgeting includes both planning for proposed
capital outlay as well as financing the project.
CAPITAL BUDGETING TECHNIQUES:The following are the techniques
used for the evaluation of the Capital Budget.1 Traditional
Non-discounted methods2. Time adjusted Discounted Cash Flow
methodPAY BACK PERIOD: Pay Back Period method is a traditional
method of evaluation of Capital budgeting decisions. The terms pay
back or payout or payoff refers to the period in which 5th project
will generate the necessary cash to recoup the initial
investment.
The PBP for a project is the time from the initial cash outflow
to Invest in it until the time when its cash inflows add up to the
initial cash Outflow. In other words, how long it takes to get your
money back. The PBP method is also referred to as the pay off
period or the capital recovery period.
The annual cash flows are calculated by taking into account the
amount of net income on account of the asset i.e. cash flows is
before depreciation but after tax.
Merits:
This method is simple to understand and easy to calculate. This
method makes it clear that no profit arises till the pay back oft
period is over. This inference is very useful for new companies in
deciding when they should start paying dividends. This method is
very useful in evaluation of those projects which involve high
uncertainty Pay Back period is very useful in the CS cases of
political instability, rapid technological development etc where
the gestation period of projects is very long. This method prefers
investments in short term periods. Therefore, it reduces the
possibility of loss on account of, obsolescence.Demerits: PBP
method ignores the returns that are generated by the project after
its PBP. This method does not take in to account "Time Value of
Money". This method also ignores the risks of the future cash
flows.
AVERAGE RATE OF RETURN (ARR):This is a traditional method of
capital budget evaluation. According to this method the capital
investment proposals are judged on the basis of their relative
profitability. The capital employed and related Income are
determined
According to Generally Accepted Accounting Principles and
practices over the entire life of the project and then the average
yield is calculated. Such a rate is called as accounting rate of
return or average rate of return or simply ARR.
ARR FORMULA: Annual Average Net Earnings
1. ------------------------------------------- X 100
Net Investment
(or)
Annual Average Net Earnings
2. ------------------------------------------- X 100
Average Investment
Net Investment
Where Average Investment =
-----------------------------------2
(Or)
Net investment + scrap value/2
This method takes into account the earnings expected from the
investment over their whole life. It is known as Accounting Rate of
Return method for the reason that under this method, the
accounting
concept of profit, net profit as per Profit & Loss a/c
arrived at after depreciation and tax is used rather than cash
inflows.
According to this method various projects are ranked in order of
the rate of earnings or rate of return. The project with the higher
rate of return is selected.
The amount of average investment can be calculated by any of the
following methods:
Net Investment
1. ---------------------------------------
2
Net Investment + Scrap Value
2. ---------------------------------------------
2
Accept / Reject Criteria:
Business Enterprises normally fix a minimum rate of return. Any
project expected to give a return below it will be straight away
objected. In case of several projects may be ranked in a
descending.
Merits:-
1. This method takes into account savings over the entire
economic life of the asset. Hence it provides a better comparison
of the project as compared to the pay back method.
2. The method embodies the concept of Net Earnings, while
evaluating the capital investment projects which are absent in case
of all other methods.Demerits:
1. The method does not take into account the time value of
money. Thus, it has to same fundamental defect as that of the pay -
back method.2. There are different methods for calculating the
Accounting Rate of Return due to diverse concepts of investments as
well as earnings. Each method gives different results. This reduces
the reliability of the method.
NET PRESENT VALUE (NPV):
NPV method or net present value method is one of the discounted
cash flow methods. This method is considered to be one of the best
methods of evaluating the capital investment proposals.
NPV method aids in value additivity. That means, the discountary
process facilitates measuring cash inflows in terms of PV, i.e. in
terms of equivalent current rupees. Therefore NPV of projects can
be added. For eg: NPV ( A + B ) = NPV ( A ) + NPV ( B )
If we know the NPVs of individual projects, the value of the
firm will increase by the sum of their NPVs. We can also say that
if we know the value of individual assets, the firms value can
simply be found by adding their values. The value-additively is an
important
property of an investment criterion because it means that each
project can be evaluated independent of others on its own
merit.
Under this method the cash inflows and outflows associated with
each project are first calculated as follows:
1
P.V.= ------------------
(1+r)n
Where PV = Present Value
r= Rate of Interest or Discount Rate
n= No. of years
The Present value for No. of years is then
A1
A2 A3
An
P.V.= ------------------ + ----------- + ------------ + .. .+
---------------
(1+r) (1+r)2 (1+r)3
(1+r)n
Note :Where A1, A2, A3 An are future net cash flows before
depreciation but before tax.
The cash inflows and out flows are then converted to the present
values using a discounting factor. This rate of return is
considered as the cut off rate and is generally determined on the
basis of the cost of capital adjusted for risk element. The cash
inflows that are considered are adjusted to arrive at the cash flow
after tax.CFAT or cash flow after tax is arrived at by deducting
depreciation interest and tax from EBIT and Tax. The residue is
called Profit After Tax (PAT). Depreciation is added to PAT to
arrive at cash flow after tax (CFAT).NPV method uses CFAT's. NPV is
the difference between the present value of cash inflows and
present value of cash outflows. The NPV method discounts cash flows
occurring at different points of time to provide for comparability.
By calculating the present value of all cash flows and aggregate
then, the NPV of the Project is calculated.
This method is superior to PBP method since it takes into
account the time value of money. However, it is more complicated.
The identification and use of the correct discounting factor
(usually the cost of capital for the given project) is another
issue. In spite
of these limitations, the NPV method is used very widely because
it provides an efficient means of estimating project viability.
Merits:
Tells whether the investment will increase the firms' value.
This method considers all the cash flows of the project.
Also considers the time value of money
Takes into account the risk less of future cash flows.
Demerits: This method requires an estimate of the cost of
capital in order to calculate the net present value. This is
expressed in terms of rupees and not as a percentage.
Criteria for Decision making of NPV:
IFThis means thatAnd there upon
NPV>0The investment is expected to increase shareholders
wealthShould accept the project.
NPV1The investment is expected to increase shareholders
wealth.Should accept the project.
PI Target Period
ARRARR > Target RateARR < Target Rate
NPVNPV > 0NPV < 0
IRRIRR > Cost of capitalIRR < Cost of capital
Profitability IndexPI > 1PI < 1
Chapter 2
COMPANY PROFILE
INDUSTRY PROFILE
SREE RAYALASEEMA ALKALIS & ALLIED CHEMICALS
LIMITEDIntroduction:
SREE RAYALASEEMA ALKALIS & ALLIED CHEMICALS LTD The torch
bearer of the conglomerate, is the only Indian manufacturer of
calcium Hypochlorite, and one of the very few in the world. A
state-of-the-art sodium process technology developed through in
house R&D efforts helps the company in manufacturing the
product with a chlorine content of 65% to 70%. SREE RAYALASEEMA
ALKALIS & ALLIED CHEMICALS LTD Exports calcium Hypochlorite
countries all across the global viz, Australia, Bangladesh,
Belgium, china, Colombia, Cyprus, Durban England, France, Germany,
Hungary, Iran, Kenya, Korea, Malaysia, Mauritius, Netherlands,
Oman, Peru, Philippines, Qatar, Sri Lanka, Saudi Arabia, Singapore,
Tanzania, Thailand, USA, etc. the certificate of merit awarded by
CHEMEXCIL for out standing export performance reinforces its status
as a galvanized export house.
Calcium Hypochlorite touches vital facets of human existence and
is of proven importance in many areas of day to day activities.
SREE RAYALASEEMA ALKALIS & ALLIED CHEMICALS LTD Has a
distinctive edge in the manufacture of this product, thanks to the
twin advantage of indigenous raw materials availability and supply
of some galvanized chemicals by Sree Rayalaseema Alkalis and allied
chemicals ltd.
The company is also a front-raking producer of Monochord acetic
acid. Manufactured by the scientific crystallizer technology, the
product meets international quality standards. Monochord acetic
acid is used by all leading manufacturers of Non-steroid
Anti-inflammatory drug, other pharmaceuticals, pesticides, organic
chemicals etc.
The vision
To empower ourselves with excellence and to thes, grow and reach
the pinnacle of market leadership.
The Mission
To provide products and services of international standards
through pioneering innovations, while keeping in sight, our
responsibility towards the society we dwell in.
ZLIST OF COMPANIES
Sree Rayalaseema Alkalies and Allied Chemicals Ltd
Sree Rayalaseema HI-STRENGTH HYPO Ltd.
Sree Rayalaseema Dutch kessenbow Ltd.
Sree Rayalaseema galaxy projects Ltd.
Sree Rayalaseema Agrochemicals (p) Ltd.
TGV Projects and investments Pvt. Ltd.
TGV info systems Ltd.
Brilliant Industries Ltd.
Brilliant securities Ltd.
Gowri Gopal Apollo Hospital.
Sree Maruthi Marine industries Ltd.
CHAIRMAN'S FOREWORD:
The new age enterprise has thrown open the doors to a world of
seamless opportunities. Time and space barriers no longer hold any
significance. Thanks to the pervasiveness of IT and the advent of
the Internet, there's never been more to learn. Or to utilize. Or
to provide. Knowledge, and its acquisition, is at hand.
It is indeed heartening that India has kept pace with the
sweeping changes in the global economy. Throwing open its doors to
globalization has meant the advent of multinational corporate
giants. The Indian economy is already gearing itself, both
qualitatively and quantitatively, to put up a fierce competition.
Given our manpower and natural resources base, there is little that
can stop us from emerging winners. At TGV, we aim to harness this
power to bring our clients, customers and associates closer to the
line of satisfaction. Without limits, without restrictions.
Having proved our credentials as quality service/product
providers in fields as varied as chemicals and hospitality, finance
and healthcare, real estate and IT, we are all set to make our mark
in the power sector too. The success of our initial forays in this
direction has invested us with the confidence to undertake projects
of greater dimension and magnitude in the near future
THE HUMAN TOUCH
The TGV conglomerate is headed by the dynamic and versatile
personality, Tumbalam Gooty Venkatesh (TGV). An entrepreneur par
excellence, his track record spans a very illustrious three-decade
period during which he has notched up achievements and accolades
galore. "There is no substitute for hard work" is what this simple
man believes in, and has staunchly displayed in deed during his
vibrant career.
The diversity of activities within the conglomerate portrays his
vast experience and understanding of various streams of knowledge
and his ability to harness the same for the generation of economic
and social wealth. A shining example of his futuristic bent of mind
is the pioneering of the Bipolar Membrane Cell Technology in the
manufacture of Caustic Soda and allied products in India.
The philanthropic facet of TG Venkatesh has come to the fore on
innumerable occasions. A host of educational institutions have been
established under his aegis. He is closely associated with national
programs for human well-being such as immunizations, eye camps,
family planning measures etc. To safeguard the health of his
employees, he has mooted a unique 'Non-smoking and Non-Alcoholic
Allowance' that'll be forwarded to the wife/parent of each of those
who desist from indulging in the hazardous activity. He is also
credited with mooting the Gowri Gopal Educational Society that has
set up a number of educational institutions under its umbrella
including Lakshmi Venkatesh TG College of Physiotherapy, affiliated
to the Govt. of Andhra Pradesh. A Nursing College, coming up as
part of Lakshmi Venkatesh TG Educational Academy, re-establishes TG
Venkatesh's humane nature.
His dynamism, his obvious compassion for his people and his
sense of service for his state have earned for TG Venkatesh, the
coveted position of a member of the Andhra Pradesh Legislative
Assembly. Recognition has poured in from various corners of the
country.
He was honoured as the Jaycees Man of the Year for his
invaluable contribution to social welfare. The Best Entrepreneur
Award, FICCI Award, Industrial Promotion Award, Kinnera Award,
Vijayshree Award, Udyogshree Award, Rajiv Ratna Award and scores of
others speak for his deep involvement in whatever he undertakes to
do. The Best Sales Tax payer Award proves his uprightness as a
responsible Indian citizen.
The TGV scion TG Bharath, is a new age visionary. Overseas
education - a post graduation in Business Administration with
International Management as elective - and work experience, plus a
disciplined Indian upbringing have inculcated in him, a deep sense
of values and an abiding respect for the state-of-the-art. A
combination that has worked wonders for the conglomerate. As the
Chairman and Managing Director of SREE RAYALASEEMA ALKALIS &
ALLIED CHEMICALS LTD and as Chairman for TGV Infosystems Ltd., TGV
Projects and Investments Pvt. Ltd., Sree Rayalaseema Dutch
Kassenbouw Ltd. and Brilliant Securities Ltd., he has commandeered
the companies to the highest echelons of achievement within two
years. Turnover has doubled, resulting in phenomenal profit soaring
as in the case of Sree Rayalaseema Hi-strength Hypo Ltd., thanks to
the imaginative cost-cutting measures introduced by him. Brilliant
Securities has established many branches under his able steering.
TG Bharath aims at making the conglomerate a force to reckon with
in the very near future, and spares no effort in this
direction.
THE CONGLOMERATE
The USD 150 million/Rupees 750 crores TGV onglomerate, backed by
a rich and varied experience spanning more than two glorious
decades, is a rapidly growing, well-diversified one, with interests
in Chemicals, Financial services, Merchant Banking, Securities,
Real Estate, Power,
Pharmaceuticals, Healthcare, Hospitality, Entertainment,
Information Technology, Personal Products, Salt and Aquaculture. A
constant effort to keep
pace with change underlines all its endeavours. A 3000+ strong
manpower base strengthens the conglomerate's resolve to excel.
The conglomerate's quality consciousness and achievements have
not gone unrecognised. National Awards for Unity, Safety,
Scientific & Industrial Research, Environmental Protection,
Research and Development and Energy Conservation, adorn the office
walls as testimonials of its dedicated efforts in these directions.
The conglomerate has also made significant philanthropic
contributions to the society.SREE RAYALASEEMA ALKALIS & ALLIED
CHEMICALS LTD was incorporated on 24 October, 1986 as a public
limited company and obtained its certificate commencement of
business on 30 October, 1986.
Initially the company has set up facilities for manufacture of
chemicals and later on the company has diversified into generation
of power through wind turbines and biomass.
Promotion
Mr. T G Venkatesh, who hails from an industrial family promoted
SRAACL. He is bestowed with experience in the art of industrial
management. Since its inception, he bestowed all the devotion and
hard work and ensured that the company worked at optimum capacity
and post a stellar performance, both in financial and technical
areas
Technology:
The company has very strong Research and Development team. They
have won nation level awards in Research and Development. They are
only manufactures of Calcium Hypochlorite in India using the Sodium
process. There are very few companies in the world with this level
of technology. Our other division benefit from the cutting edge
research.
Main products:
The main products include Sulphuric Acid, Oleum, Chioro
Sulphonic Aid, Calcium Hypochlorite, Stable Bleaching powder,
Monochloro Acetic Acid, Bleach Liquor, MCA, Sodium Hypo,
Hydrochloric Acid and Non-Ferric alum.
Geared up for Exports:
SREE RAYALASEEMA ALKALIS & ALLIED CHEMICALS LTD, the torch
bearer of the conglomerate, is only indina manufacturer of C alcium
Hypochlorite, and one of the very few in the world. A state of the
art sodium process technology developed through in house Research
Development efforts helps the company in manufacturing the product
with a chlorine content of 65% to 70% SREE RAYALASEEMA ALKALIS
& ALLIED CHEMICALS LTD, exports Calcium Hypochlorite to
countries all across the globe Viz. Australla, Bangladesh, Belgium,
Brunei, China, Colombia, Cyprus,
Durban, England, France, Germany, Hungary, Iran, Kenya, Korea,
Malaysia, Mauritius, Netherlands, Oman, Peru, Philippines, Sri
Lanka, Saudi Arabia, Singapore, Tanzania, Thailand, USA, Vietnam,
etc. the certificate of Merit awarded by CHEMEXCIL for outstanding
export performance reinforces its status as a recognized export
house.
Calcium Hypoclorite touches vital facets of human existence and
its of proven importance in many areas of day-to-day activity. SREE
RAYALASEEMA ALKALIS & ALLIED CHEMICALS LTDhas distinctive edge
in the maucfacture of this product, thanks to the twin advantages
of indigenous raw materials availability and
supply of some specialized chemicals by Sree Rayalaseema Alkalis
and Allied Chemicals Ltd.
The company is also a front-ranking producer of Monochioro Actic
Acid. Manufactured by the scientific Crystallizer technology, the
product meets international
quality standards. All leading manufacturer of Non-Seroid
Anti-Inflammatory Drugs, other pharmaceuticals, pesticides, organ
chemicals, etc use Monochloro Acetic Acids.
Product Range and Applications: Calcium Hypochlorite (Gramules
and Tablets) Stable Bleaching Powder Monochloro Acetic Acid Chloro
Sulphonic Acid Oleum 23%, 30% and 65% Bromine Battery and
commercial grades Sulphuric AcidCalcium Hypochlorite is used
extensively in aquaculture, textile, leather, Paper and Sugar
Industries. Stable Bleaching powder has taker in sanitization,
water treatment, and aquaculture and pesticide markers. Chloro
Sulphonic Acid Caters to the Pharmaceutical, and dyes &
Intermediaries Industry. Producers of dyes & intermediaries,
soaps and detergents, explosives and others use application in
various industries including petrochemicals, dye intermediates
photography, pesticides, pharmaceuticals, bleaching of paper, pulp
and others. Sulphuric Acid
finds widespread usage in sulphonation, fertilizer industry, as
an intermediary in pharmaceutical industry amongst others
Production Capacity:Product
installed Capacity
(Tons Per annum)
Calcium Hypoclorite
19800
Stable Bleaching Powder
14850
Monochloro Acetic Acid
5445
Sulphuric Acid
49500
Chloro Sulphonic Acid
26400
SREE RAYALASEEMA ALKALIS & ALLIED CHEMICALS LTDhas provided
capacitors and also uses steam for refrigeration to conserve
energy. Brick lined CSA operating efficiencies. A 9 MW biomass
powder project at Kurnool cater to the companys growing power
requirements.
SREE RAYALASEEMA ALKALIS & ALLIED CHEMICALS LTDadheres to
all international standards of quality. The ISO 14001 certification
for Environmental Management and the ISO 9002 certification for
Quality systems bear out the companys commitment to ensuring
quality of implacable standards.
PROFILE OF THE COMPANIES The TGV group companies with an asset
base of Rs 750 crores are headed by the companies.
SREE RAYALASEEMA ALKALIES & ALLIED CHEMICALS LTD
SRAACL was incorporated on 24 Jan 1981 in the state of AP &
certificate of commencement of business was obtained on 8 July
1981. SAACL was pioneering venture with bipolar membranes cell
technology in an Indian Alkali Industry. SRAACL, which is engaged
in manufacture of caustic soda, chlorine & hydrochloric acid,
is an existing profit making & dividend paying company.
Sree Rayalaseema HI-STRENGTH HYPO Ltd
SRAACL formerly known as itachi HI- strength Hypo Ltd was
incorporated on 24 Oct 1993 in the state of A.P and certificate of
commencent of Business was obtain on 30 Oct 1986. The name chaing
has taken place in the year 1993 and the same has been approved by
bits members at their annual general meeting on 30 dec 1993. SRAACL
is engaged with bleaching power, sulphuric acid etc.
SREE MARUTHI MARINE INDUSTRIES LTD:
SMMLI formerly as maruthi crystal salt company ltd was
incorporated in 1973 in the state of Tamil nadu. SMMIL is a joint
venture project with TIDCO Chennai stock exchange. It was a loss
making company which was taken over TGV in May 1990. And it was
successfully profits.
THE TGV PROJECTS AND INVESTMENTS LTD :
VVPIL formally had known as VV Tran investment Ltd was
incorporated on 12 may 1986 in the state of A.P VVPIL is engaged in
the manufacture of Chlorinated paraffin & hydrochloric acid
VVPIL is also engaged in the hire purchase and investments. A 3
star hotel with a commercial complex of 200 shops located in the
heart of the Kurnool is a unit of the company.
BRILLIANT INDUSTRIES LTD: Brilliant industries formerly known as
brilliant industries ltd was incorporated on 1 Feb. 1998 in the
state of A.P BIL is engaged in the investment in bottling and sale
of hydrogen gas. BIL is engaged in investments, hire purchase,
leasing etc. BIL is category merchant banker with branch offices at
Bangalore, Mumbai, Chennai and Delhi. The Bulk drug project of the
company is under implementation.
SREE RAYALSEEMA DUTCH KASENBOW LTD
SRDKL formerly known as sree bleaching chemicals ltd was
incorporated on 3 Sep 1990 in the state of A.P. SRCKL is engaged in
the manufacture of stable Bleaching power at its plant located at
Gondiparla, Kurnool.
SREE RAYALASEEMA GLAXY PROJECTS LTD:
SRGPL is a SSI-Exporter engaged in the manufacture of industrial
grade non ferric alum, commonly known as aluminum sulphate. SRGPL
is in its purest form and comes in fine white power, and
crystalline forms. The companies manufacturing capacity stands at
impressive of 12000 TPA.
SREE RAYALASEEMA AGRO- CHEMICALS LTD :
The company helps farmers to get better yields by manufacturing
agro chemicals of proven quality. It is efficient and potency have
been certified by the central tobacco research institute by the
Gujarat agricultural university.INDUSTRY PROFILE
Caustic Soda and Chlorine are the two basic products widely used
in the chemical industry in INDIA. Either as raw material or as
auxiliary chemical Caustic Soda is mainly used in the manufacture
of Pulp and Paper, Newsprint, Viscose, Yarn, Staple fiber,
Aluminum, Cotton Textile, Toilet and Laundry Soaps Detergents,
Dyestuffs, Drugs and Pharmaceuticals, Vanaspathi, Petroleum
Refining etc.
Chlorine is used in the manufacture of PVC, Pulp and paper,
Bleaching Powder, Textiles and Host of other inorganic and Organic
Chlorinated Compounds like metallic, Chlorides, Refrigerants,
Chlorinated Solvents etc. Large quantities of Chlorine are also
used for water purification.
Commercial Production of Caustic Soda in the country started in
1941 with the commissioning of the five Tones per day plants. One
near Calcutta (at Rishra) and the other as Metture Dam (Tamilnadu).
Process in new capacity installation was rather slow in early
years, and till the early six tees, the requirements were being
mostly met through imports, ranging in the region of 60,000 to
90,000 TPA. Installed capacity increased from 1.40 lakh tons in
1960 to 3.9 lakh tones in 1975.
Indigenous production also rose, sharply, with the result that
dependence of imports was completely avoided since 1970. Today,
there are 40 Caustic Soda manufacturing units in the Country. With
the total annual installed capacity of over 22.72 lakh tones, which
is almost double the capacity of the decade back. The Industry has
also been constantly striving towards improved energy utilization
and better environmental protection that is simply proved by the
fact energy efficient and pollution free membranes process
technology forms about 66% of total installed capacity in INDIA
today.
The major task facing the Caustic Chlorine industry now is to
increase the gainful utilization of chlorine in value added
products to international levels.
Presently the other unit which produces in the process of
Bleaching Powder apart from Dutch Kassenbouw is Sree Rayalaseema
Hypo Industry, Konark Industry Limited, Orissa and others are in
Delhi, Calcutta, Madya Pradesh and Chennai.
Bleaching powder, white or nearly white powder that is usually a
mixture of calcium chloride hypo chlorite, CaCl(OCl); calcium hypo
chlorite, Ca(OCl)2; and calcium Chloride, CaCl2, sometimes called
chloride of lime, it can be prepared by reacting calcium hydroxide
or slaked lime, Ca(OH)2, with chlorine gas C12. It is used as a
strong bleaching agent, as disinfectant. And in making javelle
water, Bleaching powder was first produced in 1799 by Charles
Tennant in Glasgow, Scotland Bleaching powder.
A white powder that decomposes on contact with water and has the
characteristic Oder of gaseous chlorine: regarded when dry, as
mixed calcium hypo chlorite chloride, used as commercial bleach for
wood pulp, textiles, oils and soaps, and in laundering as
decolorizer and disinfectant. Also called chloride of lime,
chlorinated lime, calcium oxychloride.
The major task facing the caustic chlorine industry now is to
increase the gainful utilization of chlorine in value added
products to international levels. The industry growth rate is 5% a
mess, chlorine-bleached products such as paper towels and napkins
often come to the rescue. Chlorine, which wipes out a board array
of micro organism, bacteria and viruses. Chlorine, chemistry also
may provide the floats. Patio furniture and suntan lotion that make
an afternoon by the pool more enjoyable. Presently the other units,
which produce in the process of bleaching powder apart from Sree
Rayalaseema Hi-Strength &Hypo Limited, Sree Rayalaseema
Alkalies and Allied Chemicals limited, Konark Industry limited,
Orissa Kunji Behari Chemicals (PVT) limited, Bangalore and others
are in Delhi, Calcutta, Madhya Pradesh and Chennai.
Chapter 3
RESEARCH METHODOLOGY
NEED FOR THE STUDY
OBJECTIVES OF THE STUDY
SCOPE OF THE STUDY
METHODOLOGY
LIMITATIONS OF THE STUDY
RESEARCH METHODOLOGY:
DATA SOURCES
Research can be defined as
Methodical, unbiased and compete investigation of subject matter
to establish principles
Investigation of a problems to discuss pertinent information to
help solve it .
The term methodical, refers to carefully planned procedures
(should consistently follow the same procedure). The will
facilitate the comparison of results of similar investigation over
a period of similar investigations, over a period of time as that
are arrived at by other researches investigating similar problems
in various parts of the same country of in any corner of the world
.
Both primary data and secondary data was collected from carious
sources for conducting the study . Primary data was collected from
the company, whereas the secondary data was collected from various
newspapers, journals textbooks and websites.
SOURCES OF DATA
Primary data (collected from company)
Secondary data
Tools for data collection:
Secondary Data:
Observations
Reference books
Journals
WebsitesNEED OF THE STUDY
In a previous entry I talked about the importance of having an
emergency fund consisting of six months of expenses. This is not to
be touch except in an extreme emergency. Today I am going to talk
to you about another savings account you should have but this one
you will tap into on a regular basis and that is your capital
equipment fund.
Depending on the type of business you have you will either have
a great need for capital or a small need but you still need to have
a fund set up to save the money for these important purchases.
One regular reoccurring capital expense is computers. Computers
either have to be replaced or heavily upgraded every three to five
years. Every month you should be setting aside money for future
computer needs. This not only includes the computer itself but also
printers, copiers, scanners, etc. and anything else your business
may use.
Here are the steps to take in order to start saving for your
capital needs. First thing to do is figure out when youre going to
need a new piece of equipment. Then you set a budget for how much
youre going to spend. If its something that you buy on a regular
basis you have a good basic idea on cost. If not, do some research
and add a little padding incase of price increases or changes in
needs.
The rest is pretty simple. Just divide the amount you need by
the number of time periods before the purchase and you have the
amount you need to save each time period. If you need a $1000 in 10
months and you will put away money every month then you need to put
away $100.00 each month.
By using this system you will be ready for those major purchases
and they will not take you by surprise. By budgeting for your big
purchases and having your emergency fund, you will be ready when
something major happens. After all like Dave Ramsey says, its when
your not financial prepared that Murphy will come calling.
OBJECTIVES: To use various traditional and modern capital
budgeting decision techniques like Pay Back Period, Average Rate of
Return, Net Present Value, Internal Rate of Return and
Profitability Index to evaluate the project
Estimate the costs and benefits of the project the Project.
Asses the riskiness of The project
Calculate the cost of capital Compute the criteria of merit and
judge whether the project is good or bad It estimates the
expenditure that would have to be incurred on capital projects
approved by the management together with the source from which the
required Founds would be obtained. It restricts the capital
expenditure on projects within authorized limits.SCOPE:
The Scope of the study is limited to only to this
organization.
The report is confined itself to study for period of 2005-06 to
2010-11 As most of the financial information is considered
confidential, the access to the information was restricted only to
the available Financial Statements and cross information provided
Managing Partner and the Employees. The scope of study is ITC Ltd
to collecting financial data published in annual reports of the
company with reference to the objectives stated above and an
analysis of data with a view to understand the solutions by
applying various Appraisal Methods in Capital
Budgeting.METHODOLOGY:
This study was only done in SREERAYALASEEMA ALKALIES&ALLIED
CHEMICALS LTD., KURNOOL. The Methodology followed includes annual
reports of the firm and the data is secondary.
The data was analyzed by using the techniques of Capital
Budgeting such as pay back period, Average Rate of Return and
Profitability index.
Period of Study:
The period covered by the study extends over five years from the
period of 2005-2006 and 2010-2011 The consideration for restricting
the study to this period is that the latest for manageable
consideration and investigation are available for this period.
Collection of Data:
Collection of data relating to Financial Statements of the SREE
RAYALASEEM ALKALIES &ALLIED CHEMICALS LTD KURNOOL has been
collected though annual reports from 2005-2006 to 2010-2011 which
was obtained from the company.
Plan of Study:
In the present work an attempt is made to study the analysis of
financial statements
SREE RAYALASEEMA ALKALIES&ALLIED CHEMICAL LTD., KURNOOL.
LIMITATIONS:
The information provided in the company balance sheet is only
the date source available.
The information available in the balance sheets has taken from
the published annual report, so it has only limitations.
Since financial matters are sensitive in nature the same could
not be acquired easily.
There is only two months period to finished the project, due to
lack of time in depth of financial matters have not been
touched
It has been difficult to analyze the future cash flows.
The Net Present Value is calculated with an assumption that the
Average Indian Investor expects 10% rate of return.
The Profitability Index is calculated with the Initial
Investment and 10% rate of return.
Chapter 4
DATA ANALYSIS
AND
INTERPRETATION
DATA ANALYSIS & INTERPRETATION
Initial investment =245.00PAY BACK PERIOD:
(Rs in Lakhs)YEAR
CFAT
CUMULATIVE CFAT
2005-0686.93
86.93
2006-0791.97
178.90
2007-0871.15
250.06
2008-09195.29
445.35
2009-10276.75
722.10
2010-11487.68
1209.78
Calculation :
Initial Investment
=245.00
Amount to be recovered unto
The end of 2nd year
=178.90
Amount to be recovered in 3rd year
(Remaining balance)
=66.10 (245.00178.90)
Cash flow in 3rd year
=71.15
Amount to be required
Pay Back Period
= Basic year +
Next year cash inflow
Time required for 66.1
= 11.14 month
66.10
= 2 + 12
71.15
= 2+11.14 months
= 2 yeas 11 months
= Nearly 3 years
INTERPRETATION: The Pay Back Period of the project is 2 years 11
months approximately. From Liquidity point of view, it is a good
sign because generally we give emphasis for an early recovery of
the investment.
YEARAfter Depreciation & Tax
(Rs in lakhs)
2005-0619.88
2006-0718.20
2007-0860.42
2008-0923.60
2009-01023.59
2010-1115.22
Net Profit106.91
ACCOUNTING OR AVERAGE RATE OF RETURN:-
Calculation:
Average Annual Cash Flows
ARR = ------------------------------------------- X 100
Average Investment
Average Annual Total Annual Cash Flow 106.91
Cash flows
= -----------------------------------= -----------
No. of years
6
=17.81
Net Investment
Average Investment
=--------------------------------
2Initial Investment
= 245.00
245.00
= ---------- = 122.5
2
17.81Average Rate of Return = --------- X 100
122.50
= 14.54%
Average Annual cash flows
ARR = ---------------------------------------- X 100
Initial Investment
17.81
=
------------ X 100
245.00
= 7.26 % INTERPRETATION
The Average Rate of Return of the Project is 14.54 % or 7.26 %.
As per the accounting Rate of Return the yield on the project is
low in both the method. In this expected give a return below it
will be straight away rejected.
N.P.V. (NET PRESENT VALUE):-NPV = Present value of cash inflows
- Initial Investment
PV Factor=10%
(Rs in Lakhs)
NPV
=PV Cash inflows - Initial Investment
Initial Investment=245.00
NPV
=682.02 - 245.00=437.02
YEARCASH INFLOWSP.V FACTOR AT 10%P.V. CASH INFLOWS
2005-0686.930.90979.02
2006-0791.970.82675.96
2007-0871.150.75153.43
2008-09195.290.68377.29
2009-10276.750.621121.27
2010-11487.680.564275.05
N.P.V. of Cash Inflows682.02
INTERPRETATION:-
The Net Present Value of the Project (at assumed P.V.Factor 10%)
is 682.02 lakes i.e. more than the initial investment of 245.00
Lakes
The positive NPV indicates that cash inflows are generated at a
rate higher than the opportunity cost of capital. In this project
the present value of future returns for 6 years period of work is
more then the initial investment.
Of all the methods, NPV is the best measure of projects for true
profitability. And the positive sign indicates so
IRR (Internal Rate of Return:YEARCASH INFLOWSDIS. FACTOR AT
29%P.V.CASH FLOWS
(Rs in Lakhs)
2005-0686.930.77567.37
2006-0791.970.60155.27
2007-0871.150.46633.15
2008-09195.290.36170.49
2009-10276.750.28077.49
2010-11487.680.217105.82
Total Present Value :409.59
At 29% P.V. Factor:
INTERPRETATION:-
At 29% discounting factor the Present Value for 6 years is Rs.
409.59 Lakhs which is very near to the initial investment Rs.245.00
Lakhs. Hence the IRR is 29% (approx)IRR (Internal Rate of
Return:
At 30% P.V. Factor:
(Rs. In Lakhs)
YEARCASH INFLOWSDIS. FACTOR AT 30 %P.V. CASH FLOWS
2005-0686.930.76966.84
2006-0791.970.59254.44
2007-0871.150.45532.37
2008-09195.290.35068.35
2009-10276.750.26974.44
2010-11487.680.207100.95
Total Present Value 397.39
Calculation: 245.00 - 409.59
IRR = 29 + ---------------------- 29-30
409.59 - 397.39
164.59
=29 + -------------
12.2
=29 + 13.49
=42.49%
INTERPRETATION:-
At 30% P.V. factors the Present Value of 6 years returns is
397.39 Lkhs, hence the rate of interest should be low. internal
rate of return interest is 42.49% .
PROFITABILITY INDEX (P.I.):
At an assumed rate of 10%Calculation:
Present Value of Cash inflows
P.I.=--------------------------------------------
Initial Investment
Initial Investment=245.00
Present Value of Cash inflows=788.70
788.70
P.I.=-------------
245.00P.I.=3.21%
(Rs. in Lakhs)
YEARCASH INFLOWSP.V FACTOR AT 10 %P.V. CASH FLOWS
2005-0686.930.90979.02
2006-0791.970.82675.96
2007-0871.150.75153.43
2008-09195.290.683133.38
2009-10276.750.621171.86
2010-11487.680.564275.05
N.P.V. of Cash Inflows788.70
Interpretation:-
If Profitability Index is greater than 1, the project should be
acceptable, but it is 3.21 which is near to 3.5 if the project is
accepted it may increase the share holders wealth
Chapter 5
FINDINGS
AND
SUGGESTIONS
FINDINGS The Pay Back Period of the project is 2 years 11 months
(or) 3 Years approximately. It is observed that company is able to
increase its profits year to year.
The Average Rate of Return of the project is 7.26% (or)
14.54%
The Internal Rate if Return of the Project is 42.49%
The Net Present Value of Project (at an assumed P.V. factor 10%)
is 682.02
Profitability Index is 3.21 %
Internal rate of return of the project 6 years returns (PV
factor 30%) 397.39
Internal rate of return discounting (PV Factor 29%)
Rs.409.59
The project accepted increase the share holder wealth is 3.5
SUGGESTIONS
The company should choose the project by considering the growth
and profitability.
The company should analyze the profitability and risk associated
with the project.
The company should identify the capital investment through
Capital Budgeting.
Profitability is directly related to risk, higher the profits,
greater the risk or uncertainty. Hence, proper assessment of risk
and uncertainty is very important. Hence if necessary Risk-
Adjusted Discount Rate may also considered for every Capital
Budgeting Decision.
The factors like morale of the employees, Goodwill of the firm
substantially influence the Capital Budgeting decision, hence the
firm should be very cautious
Chapter 6
CONCLUSION
BIBLIOGRAPHY
CONCLUSION
The project report is based on the capital budgeting of SREE
RAYALASEEMA ALKALIES & ALIED CHEMICALS LTD. The calculated
tools are payback period, ARR, Profitability index, and Net present
value and Internal rate of return . These can be measured the
company performance. The overall performance of the company
position is good and also the company try to concentrate of the
cash inflows side because of the net present value are satisfactory
to the company.
Finally concluded that the above thesis of the company
performance is good.
BIBLIOGRAPHY
Capital Budgeting: M.Y.Khan&P.K.Jain
Financial management- Fifth edition(9.3-9.39)Tata MC GRAW-Hill
Publishing Company Limited.
Capital Budgeting: I.M.Pandey 8th edition-vikas publishing house
private limited.
Capital Budgeting: Articles
Project management: Prasanna Chandra 5th Edition Tata MC
GRAW-Hill Publishing Company Limited.
Web Sites
www.google.com
www.tgvgroup .com
PLANNING
ANALYSIS
SELECTION
FINANCING
IMPLEMENTATION
REVIEW
Investment Criteria/ Capital Budgeting Techniques
Accounting Rate of Return
Payback Period
Internal Rate of Return
Benefit Ratio
Net Present Value
Non-Discounting Criteria
Discounting Criteria
Initial capital / Investment
Pay Back Period =
Annual Cash inflows
VIKRAMASIMHAPRI UNIVERSITY PG CENTRE KAVALIPage 51